StoneFly Networks, a San Diego storage company that raised $34 million in venture capital over the past five years but struggled to raise additional money recently, has been sold to Hayward-based Dynamic Network Factory for an undisclosed price.

Privately held DNF made an initial investment in StoneFly in December, which DNF Chief Executive Mo Tahmasebi called a strategic partnership to plan operations and expand StoneFly's product line.

The partnership blossomed into a full-fledged buyout that was expected to become official today. Tahmasebi will serve as chief executive of both StoneFly and DNF, while Dennis Hergert, StoneFly's director of operations, will run the San Diego division.

“We just moved them to a new building and signed a long-term lease for them,” Tahmasebi said. “So we're going to continue to grow in Southern California.”

Bill Atkinson, who joined StoneFly as chief executive in January 2005, has left the company, which employs about 20 workers.

Named after a trout fly, StoneFly made a splash when it was launched in 2000 with a new technology that uses Internet Protocol to optimize the operations of storage area networks.

Storage area networks typically connect data storage devices with network servers so data can be retrieved at a moment's notice. Most networks use technology that's both complex and expensive, but StoneFly's technology aimed to reduce the cost and complexity of having a data storage network by using an Internet-based networking standard.

The company landed substantial venture capital to get its pioneering technology off the ground. But StoneFly found that adoption of its new technology was slow to take hold and additional venture capital hard to find. It last received a funding round in July 2003.

Meanwhile, at least three other startups have emerged to compete with StoneFly in the IP storage area network market. And big companies such as EMC, Hewlett-Packard and IBM have begun to offer IP-based storage area network systems.

Tahmasebi said StoneFly remains a viable player in the market with loyal customers. “It's difficult to compete with them,” he said. “They have a Mercedes technology at a Toyota price.”

Tahmasebi added that the market for cost-effective storage such as StoneFly's is expected to grow fast in the next few years. According to market research firm IDC, the market for StoneFly's iSCSI storage technology (pronounced “I-scuzzy”) is expected to grow from $119 million in 2004 to $4.7 billion in 2009.

DNF was interested in StoneFly because its products have been in the market longer than competitors. It has more than 200 customers. Tahmasebi expects to push StoneFly to become a larger supplier of storage products to larger companies, which would sell them under their own brand names.

DNF was founded in 1989 and makes a host of storage products. It started as a U.S. subsidiary of Japanese conglomerate CSK Electronics. It spun out of CSK in 1999. While sales were under $100 million last year, Tahmasebi said DNF has doubled its sales each year and has 20,000 customers.